A postal worker's son raised on a tough estate in a down-at-heel neighbourhood of Brooklyn, the boss of Goldman Sachs has traded his way from a scrappy job as a gold dealer to the top of Wall Street's most powerful bank. But suddenly, in the eyes of Lloyd Blankfein, the US government is trying to destroy him.

In a series of angry, defiant phone calls last week, Blankfein told top clients that a $1bn fraud case brought against Goldman by the Securities and Exchange Commission was politically motivated and would ultimately "hurt America". A generally humorous man with a self-deprecating wit, Blankfein's usual bonhomie has been shelved.

A dimunitive, bald figure who often seems swamped by his grey pinstripe suits, Blankfein, 55, has seen his bank become a lightning rod for outrage over reckless behaviour on Wall Street. The SEC's prosecution, which alleges that Goldman fiddled customers by selling them mortgage derivatives doomed to fail, strikes at the very core of the 141-year-old firm's cherished reputation for financial integrity.

After politely applauding the president, Blankfein hurried out without a word, surrounded by a supportive posse of senior lieutenants and attendants. Approached by the Observer, he steadfastly refused to acknowledge questions, declining even to offer a "no comment". That's unusual for a man who prides himself on his repartee and his dry wit that has, at times, made Goldman's difficulties worse.

"I know I could slit my wrists and people would cheer," Blankfein quipped to one interviewer last year. That came hot on the heels of an ill-judged joke to another interviewer, intended, his spin doctors insist, to be self-aware irony, that the bank was doing "God's work".

A scholarship boy who made it to Harvard, Blankfein's first Wall Street job was for a gold dealer, J Aron & Co, in 1981. The same year, J Aron was bought by Goldman, kicking off Blankfein's rise, initially trading commodities, then fixed-income debt products and, by 2002, as head of Goldman's entire trading floor. He got the top job at Goldman four years ago when the Bush administration tapped up the bank's previous chief executive, Henry Paulson, to become treasury secretary.

His appointment surprised many at Goldman, who viewed him as a less polished figure than his predecessors at a bank noted for its elaborately courteous loyalty to corporate clients. Insiders say his background in trading is telling; once best known for its financial advisory and deal-making activities, Goldman's trading operation has become paramount under Blankfein's watch.

"He's really smart, he works very hard and he's got a very irreverent sense of humour," says Charles Ellis, author of The Partnership, a recent book on Goldman Sachs. "He's the kind of guy who'll say to you with sincerity, 'I look better on the telephone.' And he's right – he's not a handsome man."

For the first two years of Blankfein's tenure, everything went swimmingly for Goldman. After the bank racked up vast profits of $11.6bn in 2007, Blankfein was awarded a bonus of $68m, making him the highest-paid chief executive on Wall Street and exposing him, seemingly unprepared, to unprecedented scrutiny. Shortly afterwards, the financial crisis began in earnest and Goldman's sure-footedness began to seem malevolently opportunistic. The bank took huge hedging positions, betting that the US property market would plummet and, as millions of Americans faced foreclosure, it ratcheted up profits. When competitors, such as Bear Stearns and Lehman Brothers, foundered, Goldman took advantage of cheap credit available from the US Treasury.

Admirers say Blankfein's coal-face experience gives him an edge, allowing him a ready grasp of his bank's risk positioning. A former Goldman partner said: "He's a soldier's soldier. He's been a trader himself and a manager of traders. He somehow knows how to do it."

When asked about his motivation, Blankfein likes to talk of his father, a sorter for the US postal service. On his retirement, Seymour Blankfein's role was filled by a machine. Blankfein junior is said to have been haunted by the spectre of his father working for years at a job that was, in reality, redundant.

He is an unlikely character to play the role of Wall Street demon. For all his personal wealth, Blankfein is far from flash and is more likely to spend his evenings reading history books than waving around a platinum credit card in an upmarket cocktail bar. He has been married since 1983 to a former corporate lawyer, Laura, and the couple have three children. .

One of Goldman's clever ploys to protect its wealth was to take out billions of dollars of swap positions with insurer AIG, guarding itself against default on complex derivatives. When the credit crunch hit, Goldman made vast collateral calls against AIG and was blamed as a key player in the collapse of the insurance empire, which has required $180bn of aid from taxpayers. The Treasury's decision to meet AIG's commitments played into criticism of Goldman's undue influence; in the space of a single week at the height of the crisis, phone records showed that Blankfein spoke to the US treasury secretary 24 times.

Blankfein, who lives in a $26m apartment on the edge of Central Park and has a weekend estate in the Hamptons, has struggled to comprehend the public backlash against his firm's prosperity. To senior Goldman executives, the bank has merely been a canny investor on the financial markets, contributing to "liquidity" with its esoteric derivatives and helping business clients across America to raise funds for investment.

Within the sanctuary of Goldman's brand-new $2.4bn, 43-storey headquarters on West Street in lower Manhattan, public discontent initially mattered little. The Rolling Stone writer Matt Taibbi captured the popular mood in July when he characterised Goldman as a vampire squid "relentlessly jabbing its blood funnel into anything that smells like money". Goldman's flippant response was to point out that vampire squids are harmless to humans.

Finally stirred by the extent of public opprobrium, Blankfein offered a vague apology in November, telling a financial conference that his firm "participated in things that were clearly wrong and have reason to regret". But he has declined to explain exactly what he is sorry for and, in hearings in Washington probing the financial crisis, he has been bombastic in his defence.

The SEC's lawsuit against Goldman, is a stark shift in gear. No longer simply the subject of a whispering campaign, Goldman is facing the most damaging allegation that can be levelled against a bank – that it tricked its own clients. Regulators have accused Goldman of encouraging investors to punt on a shaky package of home loans named Abacus without mentioning that the contents were hand-picked by a hedge fund, Paulson & Co, which had a "short" position betting on default. Within nine months, 99% of the loans in the Abacus deal had been downgraded, leaving Royal Bank of Scotland with an $840m liability.

Richard Bove, an influential US banking analyst, has forecast Blankfein's departure, suggesting that "someone must fall on their sword for the devastating decline in this company's persona". Even the Economist, usually sympathetic to business, has twisted the knife, summing up that Goldman is "greedy until proven guilty". Blankfein seems determined to fight, adamant that the firm is a victim of envy. He will testify before Congress on Tuesday to argue Goldman's case.

He can count on certain allies – the mayor of New York, Michael Bloomberg, stood up for the bank last week. And Blankfein has, in the past, shown a capacity for putting things in proportion. When a colleague began flagging during a series of marathon meetings in the wake of the demise of Lehman Brothers, the Goldman boss reportedly offered limited sympathy.

"You're getting out of a Mercedes to go to the New York Federal Reserve," said Blankfein. "You're not getting out of a Higgins boat on Omaha beach."

THE LLOYD FILE

Born 1954 in the Bronx, New York. Brought up in the Linden projects, a housing estate in Brooklyn and won a scholarship to Harvard. Blankfein joined a gold dealer, J Aron in 1981 which was purchased by Goldman Sachs shortly afterwards and he has worked at the bank ever since.

He lives in Manhattan with his wife, Laura. The couple have three grown-up children.

Best of times Blankfein was the highest paid Wall Street boss in 2007, earning a bonus of $68m, and he was ranked as the world's 18th most powerful person last year by Forbes magazine.

Worst of times Goldman is being prosecuted by US regulators for fraud and was branded as a "great vampire squid" by one writer.

He says "There was a lot of negligent behaviour and proper bad behaviour that has to be fixed and sorted through. We don't take ourselves out of that."

They say "Lloyd Blankfein and Goldman Sachs have rightfully earned the leading role in the story of all that is wrong with Wall Street." George Goehl, executive director, National People's Action